Client Talking Points
The Russell 2000is now down double-digits (-10.2%) from where we called it the all-time #bubble high in small cap illiquidity; volume continues to accelerate on the down moves (Total Equity Market Volume +25.7% yesterday vs. 3 month average); don’t underestimate how hard it is for funds to get out of some of these exposures.
It didn’t take much (one ISM sequential slow-down print yesterday) to get us paid on the core Long Bond positions; just wait until another bad jobs report and/or multiple GDP misses; Yellen will freak like Draghi has, and there’s no long-term support for the UST 10YR Yield to 1.7% vs. 2.39% last.
Many bought “consumer stocks” on the falling oil thesis – that didn’t work (Consumer Discretionary, XLY, is -4.6% in the last month with Oil hitting new lows); this is what happened in what we call #Quad4 in 2008 as well; both inflation and growth is slowing, at the same time (we’ll outline this on the Macro Themes Call at 1:00pm EDT).
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Top Long Ideas
The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.
Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.
Three for the Road
TWEET OF THE DAY
WTI Crude Slips Below $90 for First Time in 17 Months – http://mobile.bloomberg.com/news/2014-10-02/wti-crude-slips-below-90-for-first-time-in-17-months.html
QUOTE OF THE DAY
Perseverance is the hard work you do after you get tired of doing the hard work you already did.
STAT OF THE DAY
Europe is slowing; Italy leads losers -1.4%, Portugal -1.3% and Russia continues to crash -20.7% year-to-date.